April 5, 2012 / 4:27 PM / in 6 years

Russia cbank says inflation target tough to meet

MOSCOW (Reuters) - Russia’s central bank warned on Thursday it would be difficult to hit its 5-6 percent inflation target for this year, suggesting the regulator will be cautious when it takes its upcoming monthly interest rate decision.

Speaking at a banking conference on Thursday ahead of its next policy meeting on Monday, the central bank’s Chairman Sergei Ignatyev said it was sticking to its original target despite record low inflation in recent months.

“The 5-6 percent inflation target remains. Meeting it will not be at all easy,” Ignatyev said. He later added that he saw year-end inflation at around 6 percent, at the upper end of the range.

Ignatyev said that Russia’s current 3.7 percent rate of inflation was distorted by short-term factors that would wear off later in the year.

Price increases had been subdued because of last year’s good harvest, and because the government had postponed an increase in regulated utility prices from January to July, he said.

Ignatyev added that lending and deposit rates will probably decline in the coming months as liquidity conditions improve.

“I think we are close to the local peaks of interest rates, and in the coming months interest rates for both loans to the real sector, and also bank deposits will begin to come down,” he said.

Lower market rates would reduce pressure on the central bank to cut policy rates. In recent months, Russian banks have called on the central bank to take more active steps to improve tight liquidity conditions.

Ignatyev noted that growth in the lending sector continued in 2011 and even exceeded the central bank’s expectations, with banking loans to non-financial companies rising 26 percent in 2011 and loans to households up 36 percent.

“However it is lower than in pre-crises years, which is good. We do not want an acceleration in inflation, we do not need financial bubbles,” Ignatyev said.

CAPITAL OUTFLOWS

Continuing large capital outflows from Russia suggest the central bank will adopt a cautious approach towards rate cuts, which could discourage investors from holding rubles.

Capital flight from Russia nearly doubled from a year ago in the first quarter of 2012 to $35.1 billion, central bank data showed earlier this week.

Large outflows in the first quarter of 2012 were partly caused by global sovereign debt problems, Ignatyev told the conference.

“To some extent, the capital outflow could be explained by an aggravation of the global sovereign debt crisis, which caused capital flight from emerging markets to so-called safe havens,” he said.

In other comments later on Thursday, Ignatyev said he expected net capital inflows to resume after a new government is formed next month, supported by a wave of corporate debt issuance following Russia’s sale of $7 billion in Eurobonds last week.

High oil prices so far this year have offset the negative effect of the capital outflow on the ruble, which firmed into the range where the central bank carries out interventions to limit its rise.

The central bank bought $4.3 billion in the currency market in March to limit the ruble’s rise, which is trading at around 29.50 on Thursday, up from over 32 in January.

Ignatyev said that the central bank had adjusted its target exchange rate corridor, allowing the ruble to rise by 5 kopecks against a euro-dollar currency basket to a new range of 32.15-38.15 rubles.

The strength in the ruble’s real effective exchange rate should not affect Russia’s export competitiveness, he added.

“I don’t see big risks at the moment,” he said.

But while the external conditions facing the Russian economy have improved in recent months, the chairman warned that the authorities needed to be prepared for a fresh bout of global economic turbulence.

“There is no reason to relax, because risks of a destabilization of the external situation remain,” he told the conference.

Writing by Jason Bush and Katya Golubkova; Editing by Andrew Osborn

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